The Southeast Asian Clean Energy Opportunity: Navigating the Risks

The Southeast Asian Clean Energy Opportunity: Navigating the Risks

The quest for energy security is driving policymakers in Southeast Asia to
review their energy mix, but policy, insufficient utility support and grid
stability, and a lack of transparency in the permitting process could hold
back much needed investment in clean energy in the region.

As regional economies have moved from being fuel exporters to importers, and
given the volatile geopolitical situation elsewhere with trouble continuing
to brew in the Middle East and in Russia-Ukraine, smaller countries in
Southeast Asia are looking for ways to have more control over their domestic
energy supply.

Policymakers are also cognizant of the increasing energy demand across the
region as the regional economies continue to grow. Between 2015 and 2040, in
the New Policies Scenario, Southeast Asia will need a cumulative $2.4
trillion in investment in energy supply.

Renewing the Energy Mix in Southeast Asia

Southeast Asia is blessed with good irradiation from the sun; certain
countries have great wind resources that can be tapped and others have rich
hydro resources.

Various targets have been proposed in different countries for different
energy mixes. Governments are continuing to make new policies or enhance
existing ones, which are acting as catalysts for investment in the region's
renewable energy space. These long-term plans are further broken down into
implementation targets in the area of solar, wind and hydro, with smaller
targets to be met by specific dates. As these targets are achieved, more
lessons are learned and that drives further commitments.

In the region, Thailand started focusing on renewable energy in earnest
about four years ago. The Philippines, Indonesia and Vietnam have followed
with various projects materializing periodically. Early phase success has
won the confidence of policymakers and private investors, thereby increasing
activity in this space.

Electricity prices in Southeast Asia are high, or will likely be so if
fossil fuel subsidies are taken away-and this has started happening. For
example, Indonesia has started to pull back on subsidies. This makes
renewable energy a competitive-and often compelling-proposition.

Southeast Asia also has a long history of private investment-whether
domestic or foreign. As a result, there are many benchmarks in place that
give comfort to the private sector. At a micro level-apart from policy at
the macro level-one of the key elements in infrastructure investment of any
kind is the execution and permitting process-and while greater efficiencies
in this regard are still needed, things have improved.

Dealing with Risks

Though policy has improved in recent years, this area remains a key risk.
Chief among those risks is the possibility of a material change of a policy,
particularly reverting back to a greater reliance on fossil fuels. Another
one remains the slow implementation of policies, in which case private
investors lose patience and divert their attention and money to alternative
geographies.

A second major challenge in Southeast Asia is the insufficient utility
support and grid stability. For example, in the Philippines, a sudden swing
in power generation by solar plants owing to solar overcapacity in Negros
led to curtailment. The grid in many parts of Southeast Asia does not have
the capacity to manage the new, intermittent sources of additional power.
Investment is required in the grid for the utility companies to effectively
manage these new sources.

The third risk confronting investors is around efficiency and transparency
in the permitting process. Different markets have different types of
policies to promote private investment, and sometimes there are question
marks about how and why decisions are made, which can be disturbing for
prospective investors.

In the Philippines, permitting works on a "first come, first served"
basis-but how does one determine who has met the appropriate criteria? It
can be very subjective and opaque. If the developers are not checked
thoroughly enough and results disclosed transparently, the whole process can
stalemate. This is, in fact, happening already, where the Philippine
national Energy Regulatory Commission has put on hold decisions on feed-in
tariff allocations owing to complaints made to the Department of Energy from
developers that certain solar projects were not fairly evaluated.

Project Bankability Concerns

Southeast Asia's energy requirements are immense, and despite the
governments' best efforts to promote private investment in renewable energy
to address the energy shortfall, it is going to be hard to meet future
energy demand.

Many projects are being built on a smaller scale using just equity and no
debt because the banks, due to a variety of factors, are not always willing
to lend to developers until infrastructure projects become operational.
Additionally, in order to meet tight policy implementation deadlines, there
is often not enough time to arrange full project finance from the banks,
which can take up to nine months. These factors limit the availability of
truly bankable projects.

As a result of these factors, despite the availability of the right
ingredients in the form of an abundance of resources and a strong government
push for renewable energy, annual investments in the renewable energy sector
are much lower than required.

Can Governments Inspire More Confidence?

Process is always a factor in Southeast Asia. Investors have some empathy
for policymakers who want to make sure they are making forward-looking
decisions, but occasionally, it takes governments too long. The market is in
a stop-start scenario in many countries in the region and momentum gets
lost. The Thai solar sector is a good example, where new planned phases of
purchase power agreement issuance have stalled several times. As the region
looks to draw private investment, this is a risk as overseas investors
always have the choice of where to put their money-as a result of this, some
countries could lose out on potential investments.

Another issue to address is the permitting bottleneck, which can create
uncertainty for investors. For instance, developers need to obtain multiple
certificates and approvals for any project from multiple government
agencies, and this can be prohibitively time-consuming due to its complexity
and lack of interdepartmental collaboration. However, this is an evolving
situation and things will change as authorities gain more experience.

Finally, all these processes and decisions need to be made more transparent.
Investors worry about some idiosyncratic policies and indeed reversals in
policies that can have a retroactive impact on the investment. To continue
to generate and retain private sector interest in the sector, policymakers
need to be more consistent, efficient and transparent.

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Ref:
http://www.brinknews.com/asia/the-southeast-asian-clean-energy-opportunity-n
avigating-the-risks/

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com